Have You Considered the Benefits of Auto Loan Refinancing?
If you’re one of the over 100 million Americans with an auto loan, you’d probably love the chance to ease some of the financial burden. In fact, according to data from Experian, auto loan debt continues to set record highs with $1.2 trillion in total outstanding auto loan balances. With numbers like that, it makes sense to look for ways to save. Perhaps it’s time to consider refinancing.
When done right, refinancing your auto loan can lead to lower interest rates or lower monthly payments. But before going full-speed ahead, it’s important to know that refinancing is not a one-size-fits-all process. To enjoy the complete benefits, make sure you understand the short- and long-term effects.
Here’s an in-depth look at what goes into refinancing an auto loan.
When Should You Refinance Your Auto Loan?
When deciding whether or not to refinance, it’s a good idea to start by carefully reading through the details of your existing loan and comparing them to the details of different offers from lenders. This way you can identify the best loan offer for you. You’ll also want to identify your reason for refinancing.
The two main reasons to refinance are to:
- Lower the total interest paid over the life of the loan.
- Lower your payment amount to reduce monthly expenses.
If you refinance with a lower interest rate and shorten or keep your loan term, you’ll pay less in the long run. In other words, your monthly payment won’t go down by much, but you’ll save more money overall. On the other hand, if you lower your payment amount by refinancing for a longer term, you can improve your immediate cash flow. So while you’ll have a more manageable monthly payment, you’ll end up paying more interest over the life of the loan. If possible, it’s best to use lowering your monthly payment as a temporary fix, and once your financial situation improves, you can start increasing your month-to-month payments.
Once you determine what you want to get out of refinancing, you’ll know what to be on the lookout for. Here are three situations when it would be smart to consider refinancing your car loan:
Interest rates are down
If you’d like to lower the total interest, pay attention to loan interest and shop for rates from a few different banks to find out which one offers the best deal.
Even a small change in rate can save you a substantial amount of money. Take this interest rate situation from USA Today for example:
- You have a $20,000 auto loan with a 60-month term and a 5% interest rate. Your monthly payments are $377 and you'll pay a total of $22,645.
- You decide to refinance after a year with a 48-month term at a 4% interest rate. This means your monthly payment drops to $339, so you’d now pay only $20,796 overall.
That's a difference of $38 per month and $1,859 over five years. As you can see, a lower interest rate is a great incentive for refinancing your auto loan. And if you still need convincing on the impact a lower rate can make, check out our convenient Monthly Payment Calculator. It allows you to easily figure out what your estimated monthly payment will be. Just enter a few pieces of information, including the loan amount, loan duration, and interest rate, to see how much you could save with refinancing.
Your credit health has improved
If you’re looking to refinance, it’s a good idea to know your credit score. According to an article by Experian, an improved credit history can help you obtain a lower interest rate on a refinance loan. This could save you a significant amount of interest over the life of your loan.
You may also be wondering if refinancing your loan will affect your credit score. Virtually any time you apply for a loan, the lender will run a hard inquiry on your credit report. However, this will have a minimal impact on your credit score. For most people, one credit inquiry will take five or fewer points off their scores. If you’re shopping around for different loan rates and, as a result, getting multiple inquiries around the same time, don’t fret. According to FICO, as long as the inquiries are within a short period – usually 14 days – they’ll count as just one and won’t have a negative impact.
You want a different loan term
If you feel like you’re paying too much each month for your current loan balance, it might be a great time to refinance. You could lower your monthly payment by extending the loan term. Keep in mind that while this may reduce your monthly expenses, you may be paying a lot more in interest over the life of your loan. Still, if you need help making your monthly expenses more manageable, refinancing for a longer-term could still be a good idea.
The reverse works as well. If you want to shorten the term, your monthly payment may increase, but you’ll end up reducing the overall amount of interest paid. This means more money saved in the long run.
How Do You Refinance an Auto Loan?
Once you decide refinancing makes sense, you are ready to start the process of applying for a new loan. There are some steps you’ll need to take, but in most cases, the process is relatively simple. With an online bank like Axos Bank, the process is especially simple. You can apply online in just a few minutes and receive a decision in less than 24 hours.
Documents typically needed to begin the refinancing process include:
- Personal information such as your driver license and social security number
- Income information such as your last few pay statements and tax forms from the last two to three years
- Vehicle information such as the title, registration, proof of insurance, VIN number, and mileage
- Loan information such as the lender's name and your current balance
Do your research
Once you’ve compiled the required documents, it’s time to start shopping for the best deal. To ensure you get the most out of refinancing, do some research by getting quotes from multiple lenders. Read the fine print and compare the APR, term, monthly payment, and any fees or penalties.
Online lenders, like Axos Bank, are a great refinancing source. You can complete the process from the comfort of your own home, and you can find great rates online. Ultimately, consider the main reason you want to refinance and whether each loan’s terms address that need. Smart loan-shopping should drive your decision to refinance.
Apply for the new loan
When you find an auto loan refinancing option that you like, you can move forward with filling out an official application. If you're approved, your new lender will pay off your old loan and you'll make payments to your new lender moving forward. Your car title will also need to be transferred to your new lender. In most cases, the lender will take care of this themselves. You should receive paperwork from your new lender that includes all the terms and conditions of your new loan.
During this process, it’s important that you continue making payments on your current loan until it's paid in full. After all, you don’t want your credit to take a hit because your new lender took longer than expected to pay off the old loan.
Mistakes to Avoid
While refinancing can have a positive impact on your finances, sometimes it just doesn’t make good financial sense. Avoid any bumps in the road by looking out for these situations:
- Your car is too old. Rates are usually lowest on new vehicles. Some lenders won’t even refinance loans for cars over a specific age. For example, some won’t work with cars over seven years old or with more than 100,000 miles on the car. However, Axos Bank does not use car age as a restriction as long as your vehicle has less than 125,000 miles and value falls within guidelines.
- You have a prepayment penalty. If your current loan has a prepayment penalty (a fee for paying the loan off early), refinancing might not be worth it. Penalties can cancel out any savings you get from a lower interest rate.
- You’re “underwater” on your loan. Due to depreciation, some car owners become “underwater” on their loans. This occurs when you owe more on the car than it's worth. If you find that you are underwater, try paying the difference between your balance and the car’s value before refinancing.
The Bottom Line
Before refinancing your auto loan, carefully consider whether it will work best for you. If it does, the financial benefits can be exponential. A more financially smooth ride awaits you when you refinance the right way. Want to get started? Explore Axos Bank’s Auto Loans page to learn more about the features and benefits of our auto loan refinancing program.
Have You Considered the Benefits of Auto Loan Refinancing?
This blog post was published by Axos Bank on December 17, 2019 and last updated on December 18, 2019.